Why Daimler Is Driving Hard into Korea
The jewel in the Hyundai deal is a joint venture to build trucks

Jurgen E. Schrempp is on an Asian binge. In March, the acquisitive chairman of DaimlerChrysler (DCX) paid $2.1 billion for 34% of Japanese car manufacturer Mitsubishi Motors Corp. Now, he's heading full-throttle into South Korea. On June 26, he agreed to pay $428 million for 10% of Hyundai Motor Co., with an option to increase that stake. Hyundai, which also owns Kia Motors Corp., controls 75% of the domestic car market, Asia's second-largest after Japan. Moreover, Hyundai has persuaded Schrempp to submit a joint bid for debt-laden Daewoo Motor Co.

Yet Schrempp could face some tough going. Hyundai Motor's 10-member board is controlled by the powerful Chung family, whose members are involved in a headline-grabbing feud. DaimlerChrysler and Mitsubishi will each have only one seat on Hyundai's board. So it's questionable how much influence DaimlerChrysler can wield on Hyundai's management. European executives who have dealt with Korean auto makers warn that negotiations can be tortuous and the cultural barriers are huge.

SMALL CARS. It's worth the struggle to Schrempp. The deal would strengthen DaimlerChrysler's presence in Asia and give it the knowhow to produce small, fuel-efficient cars at low cost. But the real jewel is an agreement to form a truck venture with Hyundai, which would realize DaimlerChrysler's longstanding aim: to establish an Asian foothold for its truck business. ''It's the only thing that makes sense out of the deal,'' says John K. Lawson, an auto analyst at Schroder Salomon Smith Barney in London. ''It's a 50-50 joint venture, and it starts right away.''

Although it's best known for premium car brands, DaimlerChrysler is also the world's biggest manufacturer of trucks. It has roughly a quarter of the European, North American, and Latin American markets--but only half a percent of the Asian market.

It may augur trouble that a decision has not yet been reached about who will steer the truck venture. But DaimlerChrysler will provide technology and parts, and Hyundai will contribute its distribution network and production facilities, including the Chonju factory, built in 1997 to produce 100,000 trucks a year. ''These are real assets we're talking about,'' says Dieter Zetsche, a DaimlerChrysler management board member who was a key negotiator in the deal.

Beyond trucks, the benefits aren't likely to appear soon. Schrempp has invited Hyundai to join its project to build small cars with Mitsubishi starting in 2002. It makes sense: Mitsubishi has a 4.8% stake in Hyundai, whose car-manufacturing technology is based on Mitsubishi's. ''Hyundai is a fantastic third partner for this project,'' says Zetsche. Margins in this business are razor thin, but small-car sales are expected to grow faster than the overall market.

The DaimlerChrysler and Hyundai bid for Daewoo seems a nonstarter. Reports were trickling out of Korea on June 28 that Ford Motor Co. (F) had won the right to negotiate to buy the auto maker, beating out DaimlerChrysler-Hyundai and a joint bid from General Motors (GM) and Fiat (FIA). Actually, Schrempp had never shown all that much interest in acquiring all of Daewoo, with its estimated $16 billion in debt, but he was open to buying attractive pieces of the company. Not getting Daewoo should also provide relief to DaimlerChrysler investors. They've seen their shares slide 30% in the last year. As DaimlerChrysler seeks to satisfy its Asia craving, it would be wise to pick only the choicest morsels.

By Christine Tierney in Frankfurt and Joann Muller in Detroit, with Moon Ihlwan in Seoul

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Why Daimler Is Driving Hard into Korea

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